Are Health Savings Accounts Worth Your Time? Absolutely.When you're well, sometimes it is difficult to imagine things suddenly taking a turn for the worse. 1.5 years ago, I was as healthy as could be. I thought medical problems were for other people, my checkups always came up roses.
Then I fell ill with an autoimmune neurologic condition, likely autoimmune encephalitis, and I wish I had opened a Health Saving's Account (HSA) the day I turned 18. Funny how life teaches you those lessons.
So what is an HSA?
An HSA is an investment account whose contributions are tax-deductible and withdrawals are tax-free if used for medical expenses. This type of account is only available for those with high-deductible plans health plans. The IRS defines a high deductible health plan as: any plan with a deductible of at least $1,400 for an individual or $2,800 for a family. Literally ripped that last sentence straight out of google. Sue me. If you're uninsured, you're out of luck.
So for those who have high-deductible health plans, it's a way to not only save for sudden health catastrophes, but also to grow your wealth. With Fidelity, there is no limit to what asset class you can partake in. Other HSA's may have limitations, acting more like savings accounts.
When you make a contribution, that money is tax-deductible (so you're investing with "pre-tax dollars"), and will never, ever be taxed if used to pay for a medical expense. But what if your investments have gone down and you have to sell to pay for medical bills? Hint: don't. You can reimburse your own medical bills with NO time limit. That means you could pay $1,000 for surgery using a cash-back credit card (or whatever payment method), wait until your money grows in your HSA, then reimburse yourself tax-free in 30 years. That is, if you kept the receipt ;)
By budgeting, like using YNAB, it's easy to keep track of medical expenses and reimburse yourself tax-free when it makes the most sense. Or, if you prefer, you can invest in more conservative instruments. Like CD's, which are paying as high as 4.7%. Or you can treat it like an actual savings account and enjoy Fidelity's 2.21% APY on uninvested cash.
So for those keeping score:
-Contributions are tax deductible
-Medical expenses are tax-free when you liquidate your investment(s) to cover them, which you can do retroactively with no time limit
-Growth and trading within the account is tax-free (unless you live in CALIFORNIA or NEW JERSEY. Don't ask me, but you will be taxed on trading like you would an individual brokerage account)
-You can withdraw your funds like you would an individual brokerage account at 65 (that is, you'll be taxed but not penalized)
There are pretty hefty penalties for non-medical withdrawals before you're 65: up to a 20% penalty and ordinary income tax on capital gains. Not pretty, so don't put money into an HSA that you'll need for other things.
In addition, there are yearly limits to how much can contribute. For 2023, it's $3,850 for an individual plan, $7,750 for family plans. You can alternatively roll funds over from an IRA into an HSA (but not the other way around).
I opened one today with Fidelity and will max it out every year. I use YNAB to budget, so I can keep track of my health expenses for 2023 easy peasy. It's always best to plan for the worst.
Thanks for reading, and best of health to you.
InTheMoney
